On January 1, 2014, Bedrock Company began recognizing revenues from all sales under the accrual method for financial reporting purposes and under the installment sales method for income tax purposes. Bedrock reported the following gross margin on sales for 2014 and 2015:

The enacted tax rate for both 2014 and 2015 was 30%. Assuming there are no other temporary differences, Bedrock's December 31, 2015 balance sheet would report a deferred tax liability of

Question

On January 1, 2014, Bedrock Company began recognizing revenues from all sales under the accrual method for financial reporting purposes and under the installment sales method for income tax purposes. Bedrock reported the following gross margin on sales for 2014 and 2015:

The enacted tax rate for both 2014 and 2015 was 30%. Assuming there are no other temporary differences, Bedrock's December 31, 2015 balance sheet would report a deferred tax liability of

Quizplus · Accepted Answer

The deferred tax liability is calculated by multiplying the temporary difference in gross margin on sales by the tax rate. The temporary difference is the difference between the gross margin calculated under the accrual method and the gross margin calculated under the installment sales method.

The temporary difference in gross margin on sales for 2014 is $200,000 ([$800,000 - $600,000] x 1) and for 2015 is $400,000 ([$1,200,000 - $800,000] x 1).

Therefore, the total temporary difference for both years is $600,000 ($200,000 + $400,000) and the deferred tax liability is $180,000 ($600,000 x 30%).

Thus, the correct answer is choice C.

On January 1, 2014, Bedrock Company Began Recognizing Revenues from All